A lawsuit filed against San Juan Capistrano over its water rates can go to trial after an Orange County Superior Court judge on Thursday ruled in favor of the Capistrano Taxpayers Association, a local taxpayers’ rights group, which alleges the city’s tiered rate structure violates state law.

Judge Gregory Munoz overruled a demurrer by the city, which sought to stop the lawsuit on the basis that the water rates, which were passed in 2010, were not within the statute of limitations—120 days—to legally challenge.

The case can now move on to a non-jury trial as early as June 17.

“The city argued that the water rates were capacity charges and therefore subject to a 120-day statute of limitations,” said Ben Benumof, attorney for the CTA. “It appears the judge didn’t believe that argument because if you look at the city’s water rate studies and actual chart, it labels those rates as commodity charges.”

Capacity charges apply to infrastructure whereas commodity charges relate to how much water consumers use.

The CTA, a group formed in 2011, filed the lawsuit in August, alleging that the city’s rate structure violates Proposition 218, which requires rates to be relative to cost of service.

The lawsuit goes on to claim that water rates have financed a “phantom bond” to fund water operations despite no bond ever being issued. The CTA believes high rates, as a result of the city’s controversial Groundwater Recovery Plant, could be resolved by purchasing water elsewhere.

The city’s four-tiered water rate is meant to encourage water conservation, but the lawsuit claims that charges for higher rates “are a financial penalty intended to force conservation and are not a fee for service.”

“There’s nothing wrong with tiered conservation, but it can’t exceed proportional cost of service,” Benumof said in November.

Cindy Russell, the city’s chief financial officer, told the City Council in November that the Groundwater Recovery Plant has fallen short of its projected output in the first quarter by 398 acre feet. The city had initially projected a total output for the fiscal year at 4,545 acre feet, but that number has since been reduced to 4,000 acre feet.

Meanwhile, the city’s reliance on imported water has increased by 286.9 acre feet more than projected in the quarter. The annual projection was revised and increased from 2,767 acre feet to 3,312 acre feet.

The cost to buy imported water would be offset by a reduction in electricity and chemical use at the plant due to decreased production, according to Russell. The city still expects $1.4 million in revenue from water operations, after $1.3 million is allocated for Capital Improvement Projects. That money will go toward lowering the city’s $3.9 million water deficit, which Russell projects will be made up by June 2015.